What Are the Best Auto-Deposit Settings?

Dan Egan

Managing Director of Behavioral Finance & Investing

One chunk per month? Or four smaller chunks per month? Betterment’s behavioral economist Dan Egan provides some advice on the timing of your auto-deposits.

Originally published: January 10, 2013

KEY TAKEAWAYS

Set up the deposits to occur the first business day after your paycheck is deposited to keep spending and saving money separate.

Our clients send some great questions our way, which often should be shared. We received a good one recently which I had to consider myself when saving with Betterment:

I was wondering if I could get some advice pertaining to the timing of making deposits. For example, I was considering contributing $200 a month or $50 a week to my account. Obviously it will equal out to be the same amount but would that effect my outcome of ROE? Just a thought. Thanks for your input.

Back when I was setting up my accounts, I had to think about this as well, and came to the conclusion that the best way (for me, at least) was to depositas soon as I could after being paid. Let me take you though my reasoning.

Some advice on the timing of your auto-deposits.

First, I strongly subscribe to the maxim that it’s “time in the market, not timing the market” which produces positive investment returns. If I delayed or attempted to be strategic with my deposits, I could end up sitting on cash for a long time (if the time is never “right”) and having inflation eat away at it. Or I might miss a dividend or coupon or other income event. So from a tactical investment perspective, it is best for me to invest as soon as possible.

Second, I have a pretty defined budget I want to stick to. I find it confusing to have “extra” cash in my checking account which is actually already earmarked for savings, and if I have Betterment asking for cash which I’ve already spent, I could end up going overdrawn. Both these things lead me to not want to have “Betterment Cash” in my checking account, as it can cause problems. This won’t happen right when I get paid.

So I set up the deposits to occur the first business day after I knew my paycheck would be deposited. This has worked excellently. It keeps my spending and saving money separate, and ensures that everything in my budget works smoothly.

Any other ideas about how to best time your deposits?

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Dan Egan is the Director of Behavioral Finance and Investments at Betterment. He has spent his career using behavioral finance to help people make better financial and investment decisions. Dan is a published author of multiple publications related to behavioral economics. He lectures at New York University, London Business School, and the London School of Economics on the topic.
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8 thoughts on “What Are the Best Auto-Deposit Settings?”

I do a transfer set for every payday. Actually, to account for market holidays etc, I auto-transfer from my checking to savings every Friday (when I get paid) and then let Betterment take the money on Monday (sometimes Tuesday if the market is closed Monday).

Actually you’ll end up contributing a bit more if you do it every week instead of monthly. There are 52 weeks a year (4 x 13) not 48 (4 x 12), so it would be like contributing an extra month with 4 extra deposits. (It works out similar with two extra deposits a year for bi-weekly, which I use.)

Dan.. good information but I’m not really sure I got an answer to the question of “is it better to invest once a month or do the smaller amounts 2 or 4 times each month equaling that same monthly amount?” So is $200 better than $50 x 4…

I think he did. The answer was “time IN the market, not timing OF the market”. If Fund XXX pays a dividend this coming Friday, it was better to have deposited money in prior to that dividend, rather than at the end of the month, or you miss out.

If you are saving for a long term goal, the difference is probably negligible (though data may prove me wrong).

Dan,
I use the opposite perspective with my Betterment account. I spread my deposits out on a weekly basis so that I can hit the market at different times. If I was to put all of my money in at once sure I could hit a down day or a dividend, but I could also end up buying on the highest day of the month. I think it is different for everyone and their situation dictates how they invest. I could afford to do one large chunck per month but choose to do it each week instead.

I have it pull out of an investment checking account weekly. Its very rare that I would need the money for any reason but If I do, then its not all coming out at once and I can redirect things. It addresses the human aspect of my not being rich enough to put large amounts into investments in at a time.

I don’t like the idea of Betterment pulling directly out of a separate “investment” checking account for 2 reasons: 1 is security. This is online transactions here. Lets be aware of the possibility of hacking. The 2nd is that my checking account is volatile while the investment account can stay organized with its withdrawls. The investment checking is also designed with a little bit of buffer as well.

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